Goldcorp to Buy Exeter Resource

Exeter Resource, Goldcorp enter agreement to proceed with acquisition

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Exeter Resource (XRA) has entered into an arrangement agreement with Goldcorp (GG) pursuant to which Goldcorp has agreed to acquire all common shares of Exeter not already owned by Goldcorp by way of a plan of arrangement.

The arrangement, which is subject to the approval of the holders of Exeter, will constitute the subsequent acquisition transaction proposed by Goldcorp in order to acquire all Exeter shares it did not acquire under its offer to purchase dated April 20.

Goldcorp currently owns a total of roughly 78M Exeter Shares, representing approximately 83.16% of issued and outstanding Exeter shares.

A special meeting of Exeter shareholders has been called for July 31 to consider, and if thought advisable, pass a special resolution in relation to the arrangement.

The consideration payable under the arrangement is the same as the consideration received by Exeter shareholders under the offer. Exeter shareholders will be entitled to receive 0.12 of a Goldcorp share for each Exeter share.

Closing of the arrangement is expected to take place on or about August 2. At that time, Exeter will become a wholly-owned subsidiary of Goldcorp, the Exeter shares will be delisted, and Exeter will apply to cease to be a reporting issuer.

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Ameresco Selected by Chicago to Update City Lights

Amerseco selected by Chicago for Smart Street Lighting Project

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Ameresco receives contract from Chicago

Ameresco (AMRC) announced it has contracted with the City of Chicago for the city’s comprehensive Smart Street Lighting Project to modernize its infrastructure.

Working with Silver Spring Networks (SSNI), a networking platform and solutions provider for the Internet of Important Things, the project is believed to be the largest city-led wireless smart street light program in the U.S., and will connect more than 250,000 street light fixtures across Chicago.

The four-year modernization project is expected to transform Chicago’s street light system by replacing approximately 85% of the city’s existing street lights with smart LEDs.

The multi-phase project will commence this summer.

The new smart LED street lights will be owned and operated by the City of Chicago, supported by Silver Spring Networks’ managed services and its Streetlight.Vision Control and Management System software.

The new LED street lights are expected to consume between 50 and 75% less electricity than the city’s existing lighting infrastructure.

Silver Spring’s IPv6 platform will enable the City to remotely dim or brighten street lights as needed, as well as to remotely monitor street lights for proactive maintenance and faster repairs if failures do occur.

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FDA Grants Conatus’ IDN-7314 Orphan Drug Designation

Conatus (CNAT) granted orphan drug designation for IDN-7314 for treatment of PSC

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Conatus Pharmaceuticals (CNAT) announced that the U.S. FDA has granted Orphan Drug Designation to Conatus’ drug candidate IDN-7314 for the treatment of primary sclerosing cholangitis, a disease affecting bile ducts in the liver which can lead to cirrhosis and liver failure.

The FDA’s Orphan Drug Designation program is intended to encourage the development of drugs and biologics that may provide benefit to patients suffering from rare diseases or conditions.

IDN-7314 is an orally active pan-caspase protease inhibitor designed to reduce the activity of enzymes that mediate inflammation and cell death, which has demonstrated reduction of relevant biomarkers in two preclinical models of PSC. One nonclinical model, the Mdr2-/- mouse model, is considered the current benchmark nonclinical model of PSC.

A new preclinical model, second mitochondria-derived activator of caspases-mimetic induced PSC in mice, has recently been reported that reproduces much of the phenotype of human PSC. IDN-7314 significantly improved biochemical indices of hepatic and biliary damage in these murine models of PSC, and these results suggest the involvement of caspases in the progression of PSC.

Other stocks to watch include: ICPT, INCY and AZN.

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Barron’s Is Bullish on Cigna, Red Hat

Barron’s is bullish on RHT, UTHR, ALXN, CI, AIZ, and NCR

Barron’s remains bearish on Foot Locker (FL)

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Barron’s, the weekly publication owned by the Wall Street Journal, in its latest issue is bullish on several names. They include:

Shares of NCR Corp. (NCR) could gain 30% in a year, Barron’s contends in a feature article. The publication argues that the cash-register company is a “rising software star with the discount valuation of a legacy hardware player,” and that NCR has opportunities to sell digital capabilities to retailers threatened by e-commerce leaders.

Assurant (AIZ) could double as investors reevaluate company.  Assurant is shifting toward a capital-light model, and some investors believe the stock could double in coming years as Wall Street begins to appreciate the company’s new focus on fee-based businesses, Barron’s contends in a feature article. In an interview with the publication, CEO Alan Colberg said Assurant is “on track for double-digit earnings-per-share growth this year.”

Alexion, United Therapeutics worth a look. After the recent jump in biotech stocks, Barron’s urges investors to look for companies that haven’t yet joined the rally, or that have unique reasons for potentially continuing higher. In a ‘Trader Extra’ column, Barron’s notes that a Credit Suisse screen of “fresh ideas” included Alexion Pharmaceuticals (ALXN) and United Therapeutics (UTHR), and the publication argues that both “could be attractive now” given the former’s now concluded sales investigation and the latter’s cheap valuation.

Red Hat may eke out double-digit returns.  Red Hat (RHT) investors shouldn’t take profits yet, as order momentum and Wall Street’s appetite for growth suggest the stock can “eke out” double-digit returns in the year ahead, Barron’s contends in a ‘Follow Up’ column. The publication cautions that “it’s a close call.”

Cigna could gain over 15% by end of next year.  The GOP healthcare plan looks like a boon for Cigna (CI) and other insurers, and the stock could gain more than 15% by the end of next year, Barron’s contends in a ‘Follow Up’ column. Passage of the plan is “far from certain,” but it proposes to remove taxes, inject funding into insurance markets, and ease requirements on how much insurers spend on health care, Barron’s explains. Cigna has taken a “cautious approach” to Obamacare, and the company seems to be “firing on all cylinders,” the publication adds.

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Rigs Counts Continue to Rise

Baker Hughes reports U.S. rig count up 8 to 941 rigs

This marks the 23rd straight week of increases

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Baker Hughes (BHI) reports that the U.S. rig count is up 8 rigs from last week to 941, with oil rigs up 11 to 758, gas rigs down 3 to 183.

 

The U.S. Rig Count is up 520 rigs from last year’s count of 421, with oil rigs up 428, gas rigs up 93, and miscellaneous rigs down 1 to 0.
The U.S. Offshore Rig Count is unchanged from last week at 22 and up 1 rig year over year.
The Canadian Rig Count is up 11 rigs from last week to 170, with oil rigs up 7 to 98 and gas rigs up 4 to 72.
The Canadian Rig Count is up 94 rigs from last year’s count of 76, with oil rigs up 62, gas rigs up 33, and miscellaneous rigs down 1 to 0.

 

This marks the 23rd straight week of increases, and comes despite oil prices having fallen below $43 bbl this week into bear market territory.

 

#WTI is on track for its worst 1H since the 1990s. WTI crude prices are presently down by 20.2% on the year-to-date.

 

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Box Office Battle for this Weekend

‘Transformers’ expected to top ‘Cars 3,’ ‘Wonder Woman’

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Viacom (VIA, VIAB) subsidiary Paramount’s “Transformers: The Last Knight,” the fifth installment in the transforming robots series, is expected to open domestically at about $46M, after opening Wednesday to an estimated $15.7M, the lowest single-day opening for any film in the Transformers franchise, which hints at franchise fatigue.

Disney/Pixar’s (DIS) “Cars 3,” an animated film featuring anthropomorphic cars, is expected to take second place this weekend with a domestic gross of around $29M, after topping the box office in its opening weekend last week.

Time Warner’s (TWX) superhero flick “Wonder Woman,” starring Gal Gadot, is expected to take third place in its fourth weekend at theaters, earning an additional $28M-$29M, which would bring the domestic total for the film to $322M.

Lionsgate’s (LGF.A, LGF.B) Tupac biography “All Eyez on Me” is expected to earn an additional $9M-$10M domestically, after opening last weekend with $26.4M.

Other publicly traded companies in filmmaking include 21st Century Fox (FOX, FOXA), Comcast (CMCSA, CMCSK), and Sony (SNE).

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FDA Approves Portola Pharmaceuticals’ Bevyxxa

Portola Pharmaceuticals announces FDA approval of Bevyxxa, Shares rise 45%

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#Portola Pharmaceuticals (PTLA) announced the U.S. Food and Drug Administration has approved #Bevyxxa, which it said is “the first and only” anticoagulant for hospital and extended duration prophylaxis of venous thromboembolism, or #VTE, in adult patients hospitalized for an acute medical illness who are at risk for thromboembolic complications due to moderate or severe restricted mobility and other risk factors for VTE.

The drug, BevyxXa, known also as betrixaban, is the first oral treatment and first extended duration treatment for this patient population, the company said.

Roughly 200,000 people in the United States develop deep vein #thrombosis each year, with about 40,000 of them dying of pulmonary embolism, caused when a blood clot breaks loose and travels to the lungs, blocking blood flow, the company said.

The timeline on which Portola expects to launch Bevyxxa is between August and November 2017.

During this period, Portola will complete salesforce hiring and training, drug manufacturing validation and inventory buildup, the company said.

BevyxXa was tested using a novel clinical trial strategy designed to test a series of subgroups before testing the broader patient population. It first tested the highest risk patients. Then it tested a lower risk group, and finally the overall patient population.

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Glencore Raises Offer for Rio Tinto’s Coal & Allied

Glencore raises offer for Rio Tinto’s Coal & Allied to $2.675B plus royalties

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Glencore (GLNCY) announced that it has submitted an improved irrevocable binding offer to acquire Rio Tinto’s (RIO) 100% interest in Coal & Allied Industries Limited for $2.675B cash plus a coal price linked royalty.

All cash is payable in full immediately upon completion. Glencore’s offer is at least $225M greater than Yancoal’s proposal, the company stated.

The Glencore offer remains conditional only on approval from China, Korea, Taiwan and Australia. Japanese regulatory approval to acquire C&A has already been obtained. “Demonstrating our confidence in securing all approvals, Glencore’s Offer is supported by a $225M deposit which will be forfeited if the transaction does not complete as a result of a failure to obtain a regulatory approval.

Glencore believes that it will obtain all regulatory approvals in a timely manner and that its offer fully compensates Rio Tinto for any potential delays beyond Yancoal’s expected completion date as announced by Rio Tinto,” the company said.

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AVEO Oncology’s FOTIVDA Receives Europe’s Pre Approval for Renal Cell Carcinoma

AVEO Oncology reports positive CHMP opinion for tivozanib as RCC treatment

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AVEO Oncology (AVEO) announced that the Committee for Medicinal Products for Human Use, the scientific committee of the European Medicines Agency, has recommended #FOTIVDA for approval as a treatment for patients with advanced renal cell carcinoma.

The #CHMP’s recommendation is now referred to the European Commission.

The EC, which typically adheres to the recommendation of the CHMP, but is not obligated to do so, is expected to make its final decision in about 67 days.

If approved by the EC, marketing authorization for tivozanib will be granted in all 28 countries of the European Union, Norway, Iceland and Liechtenstein. EUSA Pharma, a specialty pharmaceutical company with a focus on oncology and oncology supportive care, is the European licensee for tivozanib.

Under the terms of their December 2015 agreement, EUSA Pharma has agreed to pay AVEO up to $394M in future research and development funding and milestone payments, assuming successful achievement of specified development, regulatory and commercialization objectives, as well as a tiered royalty ranging from a low double-digit up to mid-twenty percent on net sales of tivozanib in the agreement’s territories.

Thirty percent of milestone and royalty payments received by AVEO, excluding research and development funding, are due to Kyowa Hakko Kirin as a sublicensing fee in Europe.

In the United States, the royalty obligation to KHK ranges from the low- to mid-teens on net sales.

AVEO says, “If the European Commission grants marketing approval for #tivozanib, it would trigger a $4 million research and development reimbursement payment from EUSA, and AVEO will also be eligible for up to $12M in additional milestones from EUSA based on member state reimbursement and regulatory approvals.

These payments would add significant resources to our balance sheet as we work toward the anticipated readout of our U.S. pivotal trial in third-line RCC, the TIVO-3 trial, in the first quarter of 2018.”

AVEO closed at $0.72. Shares are up 50% in pre-market trading.


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Cara Therapeutics Sharply Higher on FDA Action

FDA has granted Breakthrough Therapy designation to I.V. CR845 for the treatment of moderate-to-severe uremic pruritus in chronic kidney disease patients undergoing hemodialysis

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Cara Therapeutics announced that the FDA has granted Breakthrough Therapy designation to I.V. CR845 for the treatment of moderate-to-severe uremic pruritus in chronic kidney disease patients undergoing hemodialysis.

Cara Therapeutics, Inc. (CARA) is a biopharmaceutical company. The company is focused on developing and commercializing new chemical entities designed to alleviate pain and pruritus by selectively targeting peripheral kappa opioid receptors.

“The FDA’s decision to grant Breakthrough Therapy designation is recognition of both the significant unmet medical need among CKD patients with UP and the potential of I.V. CR845 to address it,” said Derek Chalmers, Ph.D., D.Sc., President and Chief Executive Officer of Cara Therapeutics.

“We have already initiated our Phase 3 program and look forward to working closely with the FDA to bring this potential new treatment option to hemodialysis patients as quickly as possible.”

Breakthrough Therapy designation is granted to expedite the development and review process for new therapies addressing serious or life-threatening conditions, where preliminary clinical evidence indicates that the drug candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.

CARA closed at $24.25. Shares are up $2 in pre-market trading.

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Republicans draft of ACA replacement bill Boosts Hospitals, Insurers

Funding for Medicaid will be phased out from 2020 to 2024 and additional cuts would begin in 2025

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Shares of hospital and health insurance stocks are rising this afternoon after Senate Republicans released a draft of their Affordable Care Act replacement bill.

WHAT’S NOTABLE

The draft includes cuts to #Medicaid and restructures the program from an open-ended government funding commitment to a limited federal payments system.

The bill also repeals billions of tax dollars used to expand coverage and abolishes the ACA’s mandates to purchase coverage.

Under the draft, federal funding for Medicaid will be phased out from 2020 to 2024 and additional cuts would begin in 2025, as the cap on Medicaid payments begins to grow at a slower rate.

While the bill retains some of the ACA’s tax credit structure, which assists citizens in buying private coverage, senators have reshaped the credits so they are less generous and less costly to the government. The bill is expected to be voted on next week.

COMPANIES TO WATCH

Publicly traded hospital operators include HCA Holdings (HCA), LifePoint (LPNT), Tenet Healthcare (THC), Community Health (CYH) and Quorum Health (QHC) and health insurance providers include Aetna (AET), Anthem (ANTM), Centene (CNC), Cigna (CI), Humana (HUM), Molina Healthcare (MOH), UnitedHealth (UNH) and WellCare (WCG).

PRICE ACTION

HCA was up 3.8%, LifePoint rose 3.3%, Tenet was up 8.7%, Community Health rose 8.4% and Quorum was up 8.3% in afternoon trading. Aetna, Anthem and Centene also rose 1.3%, 1% and 3.6%, respectively. Cigna was up 1.1%, Humana rose 1.5%, Molina gained 2.6%, UnitedHealth was up 1.5% and WellCare was up 3.5%.

Chinese Internet Stocks Tumble

Chinese internet stocks fall following report of streaming ban

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Shares of Chinese internet companies Sina (SINA), Weibo (WB), Phoenix New Media (FENG), YY (YY) and Momo (MOMO) are falling following reports that Chinese regulators are cracking down on online videos and streaming in an effort to police online content.

WHAT’S NEW

The State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China has ordered internet platforms Sina Weibo, Phoenix New Media’s iFeng and ACFUN to stop all video and streaming services as China increases its efforts to cut down the dissemination of “vulgar content.”

The regulator said the companies do not have the necessary license to stream content and were “not in line with national audiovisual regulations and propagating negative speech.” The move is seen as a blow to Sina Weibo which has invested in livestreaming companies and announced a partnership in December with the National Football League to stream games.

It is unclear if the ban on streaming is temporary or permanent.

WEIBO CONFIRMS RECEIPT OF NOTICE

Following the report, Weibo announced that it became aware of a public notice issued by The State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China stating that the SAPPRFT had recently requested the local competent authorities to take measures to suspend several companies’ video and audio services due to their lacking of an internet audio/video program transmission license and posting of certain commentary programs with content in violation of government regulations on their sites, and Weibo is named as one of these companies.

The company said it is “communicating with the relevant government authorities to understand the scope of the notice” and “intends to fully cooperate with the relevant authorities.”

PRICE ACTION

Sina was down 7.5% to $85.07, Weibo fell 9.6% to $69.57, Phoenix New Media was down 2.2% to $2.69, YY dropped 3.5% to $56.90 and Momo fell 2.5% to $37.75 in morning trading.

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Novartis Reports Positive Results, Shares Rise

Novartis Phase III CANTOS study met primary endpoint

Durect (DRRX) completes enrollment in Phase 3 trial for pain relief candidate Posimir

#Novartis (NVS) announced topline results from the global Phase III CANTOS study investigating the efficacy, safety and tolerability of ACZ885 in combination with standard of care in people with a prior heart attack and inflammatory atherosclerosis.

With more than 10,000 patients enrolled in the study over the last six years, #CANTOS is one of the largest and longest-running clinical trials in Novartis’ history.

The CANTOS study met the primary endpoint, demonstrating that when used in combination with standard of care ACZ885 reduces the risk of major adverse cardiovascular events, or MACE, a composite of cardiovascular death, non-fatal myocardial infarction and non-fatal stroke, in patients with a prior heart attack and inflammatory atherosclerosis.

The full data from the study will be submitted for presentation at a medical congress and for peer reviewed publication later this year.

Durect Data

Separately, Novartis announced that #Durect (DRRX) has completed patient enrollment in PERSIST, the pivotal Phase 3 clinical trial of Posimir, an investigational locally acting, non-opioid analgesic intended to provide up to three days of continuous pain relief after surgery.

The company expects to complete patient follow-up visits during Q3 and announce top-line data in Q4.

In May 2017, Durect signed a development and commercialization agreement with Sandoz AG, a division of Novartis (NVS), covering the U.S.

Under the terms of the agreement, #Sandoz made an upfront payment to Durect of $20M following review under the HSR Antitrust Improvements Act of 1976, with the potential for up to an additional $43M in development and regulatory milestones, up to an additional $230M in sales-based milestones, as well as a tiered double-digit royalty on product sales in the U.S. Durect remains responsible for the completion of the ongoing PERSIST Phase 3 clinical trial for #Posimir as well as FDA interactions through approval.

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Oil Stocks Downgraded

Oil entered the first bear market since August as concerns worsen over a global supply glut

The number of downgrades may, from a contrarian point, signal oil’s bottom

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A number of oil related stocks are down this morning after brokers downgraded several oil related stocks. Oil entered the first bear market since August as concerns worsen that OPEC is failing to ease a global supply glut.

Adding to an oversupplied market are Libya, which is pumping the most in four years, and shale drillers that are staging the longest drilling ramp-up on record. Meanwhile traders are hoarding an increasing amount of oil in tankers. All that crude is hindering efforts by the Organization of Petroleum Exporting Countries and its allies to reduce stockpiles to the five-year average.

The American Petroleum Institute (API) reported a draw of 2.72 million barrels in United States crude oil inventories, compared to analyst expectations that the EIA would report a 2.0-million barrel draw for the week ending June 16. This week’s inventory draw almost completely offsets last week’s API-reported crude inventory build of 2.75 million barrels.

Gasoline inventories rose this week by 346,000 barrels, as refiners continue to take crude oil out of inventory and turn it into gasoline. Surveyed analysts were close on gasoline predictions this week, expecting a 400,000-barrel build for the fuel, but even though the API report was close to projections, the three-week rise in inventories mean that demand for the fuel is not sufficient to cut into inventories as one would expect this time of year.

The Energy Department reports its inventory data at 10:30 a.m. today.  Based on the number of downgrades, it may be a bottom for oil prices!

Crude oil last traded at $43.70 per barrel.

Here is a list of oil stocks downgraded today:

Downgrades

AON Aon plc to Neutral from Buy at Janney Capital
APA Apache to Sell from Neutral at Seaport Global
AREX Approach Resources to Sell from Neutral at Seaport Global
AXAS Abraxas Petroleum to Neutral from Buy at Seaport Global
AXTA Axalta Coating to Underperform from Buy at BofA/Merrill
BAS Basic Energy to Neutral from Buy at Seaport Global
BBG Bill Barrett to Sell from Neutral at Seaport Global
BHI Baker Hughes to Neutral from Buy at Seaport Global
BP BP to Underperform from Neutral at Macquarie
CHK Chesapeake to Underperform from Neutral at Macquarie
CIR CIRCOR to Sell from Neutral at Seaport Global
CLR Continental Resources to Sell from Buy at Seaport Global
CPE Callon Petroleum to Neutral from Buy at Seaport Global
CRZO Carrizo Oil & Gas to Sell from Buy at Seaport Global
CRZO Carrizo Oil & Gas to Sell from Buy at Seaport Global
CVE Cenovus Energy to Underperform from Neutral at Macquarie
CVX Chevron to Neutral from Outperform at Macquarie
CXO Concho Resources to Neutral from Buy at Seaport Global
DO Diamond Offshore to Sell from Neutral at Seaport Global
DOV Dover to Neutral from Buy at Seaport Global
DVN Devon Energy Neutral at Seaport Global
E Eni SpA to Neutral from Outperform at Macquarie
ECA Encana to Neutral from Outperform at Macquarie
ECR Eclipse Resources to Neutral from Buy at Seaport Global
EGN Energen to Sell from Neutral at Seaport Global
ESES Eco-Stim Energy to Neutral from Buy at Seaport Global
ESTE Earthstone Energy to Neutral from Buy at Seaport Global
ESV Ensco to Sell from Neutral at Seaport Global
FI Frank’s International to Underweight from Equal Weight at Morgan Stanley
FI Frank’s International to Sell from Neutral at Seaport Global
GST Gastar Exploration to Neutral from Buy at Seaport Global
HAL Halliburton to Neutral from Buy at Seaport Global
HK Halcon Resources to Neutral from Buy at Seaport Global
HP Helmerich & Payne to Sell from Neutral at Seaport Global
HP Helmerich & Payne to Underweight from Equal Weight at Morgan Stanley
ICD Independence Contract Drilling to Equal Weight at Morgan Stanley
JONE Jones Energy to Neutral from Buy at Seaport Global
KEG Key Energy to Neutral from Buy at Seaport Global
LONE Lonestar Resources to Neutral from Buy at Seaport Global
LPI Laredo Petroleum to Neutral from Buy at Seaport Global
MRC MRC Global to Neutral from Buy at Seaport Global
MRO Marathon Oil to Sell from Neutral at Seaport Global
NBL Noble Energy to Sell from Neutral at Seaport Global
NBR Nabors Industries to Equal Weight from Overweight at Morgan Stanley
NBR Nabors Industries to Neutral from Buy at Seaport Global
NE Noble Corp. to Neutral from Buy at Seaport Global
NFX Newfield Exploration to Sell from Buy at Seaport Global
OAS Oasis Petroleum to Neutral from Buy at Seaport Global
OII Oceaneering to Sell from Neutral at Seaport Global
OII Oceaneering to Underweight from Equal Weight at Morgan Stanley
OIS Oil States to Equal Weight from Overweight at Morgan Stanley
PDCE PDC Energy to Neutral from Buy at Seaport Global
PDS Precision Drilling to Equal Weight from Overweight at Morgan Stanley
PES Pioneer Energy to Neutral from Buy at Seaport Global
PQ PetroQuest to Neutral from Buy at Seaport Global
PTEN Patterson-UTI to Neutral from Buy at Seaport Global
RDC Rowan Companies to Sell from Neutral at Seaport Global
RDS.A Royal Dutch Shell to Neutral from Outperform at Macquarie
REPYY Repsol to Neutral from Outperform at Macquarie
RES RPC, Inc. to Neutral from Buy at Seaport Global
RICE Rice Energy to Neutral from Buy at Seaport Global
SD SandRidge Energy to Neutral from Buy at Seaport Global
SM SM Energy to Neutral from Buy at Seaport Global
SN Sanchez Energy to Sell from Buy at Seaport Global
SNDE Sundance Energy to Neutral from Buy at Seaport Global
SPN Superior Energy to Neutral from Buy at Seaport Global
SRCI SRC Energy to Neutral from Buy at Seaport Global
WFT Weatherford to Neutral from Buy at Seaport Global
WLL Whiting Petroleum to Sell from Neutral at Seaport Global
WLL Whiting Petroleum to Neutral from Outperform at Macquarie
WPX WPX Energy to Sell from Buy at Seaport Global
XEC Cimarex Energy to Sell from Neutral at Seaport Global

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Chipotle Warns of High Costs, Shares Slide

Chipotle falls after signaling continued high costs to win back consumers

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Shares of Chipotle Mexican Grill (CMG) fell Tuesday after the restaurant chain “clarified” its second quarter outlook, appearing to confirm that costs related to food, marketing, and promotion will remain elevated as it seeks to regain consumer trust following its 2015 food scares.

CHIPOTLE WARNS ON COSTS

In a regulatory filing after Monday’s close, Chipotle “clarified” its financial outlook in connection with an investor meeting, saying that “for Q2, we continue to expect food costs to be approximately 34.2% of sales, and marketing and promotion costs to be up approximately 20-30 basis points versus Q1 to 3.6%-3.7% of sales. As a result, we expect other operating costs as a percentage of sales for Q2 to be at or slightly higher than reported for Q1. For the full year, we continue to expect comparable restaurant sales increases in the high single digits.”

PIPER MAKES ONLY MINOR TWEAKS:

Piper Jaffray’s Nicole Regan highlighted that the news follows a “solid” Q1 report and says the Q2 guidance update necessitates only “relatively minor” tweaks to her quarterly models. The analyst maintains her earnings predictions for both 2017 and 2018, adding that the firm’s latest checks generally reflect the consensus opinion that trends are now “headed in the right direction,” likely helped by Chipotle’s TV campaign. Regan reiterated an Overweight rating and $530 target on the stock while noting that its next catalyst is “stringing together a series of steady quarterly improvements.”

MAXIM PREFERS DEEPER PULLBACK

While keeping a Hold rating and $440 target on Chipotle, Maxim’s Stephen Anderson cut his Q2 profit estimate to $2.62 from $2.87 per share on the company’s likely higher costs, adding that he had previously expected food expenses to improve as promotional activity and commodity prices eased. The analyst models double-digit comparable sales growth for the quarter while warning of impacts from the Easter holiday shift and Chipotle’s recently-disclosed data breach, saying he still prefers to wait for a “deeper pullback” before recommending the stock.

DEUTSCHE HIGHLIGHTS MARGIN CONCERNS

Writing that margin recovery “remains under pressure,” Deutsche Bank analyst Brett Levy says food, marketing, and other operating costs continue to form an “apparent drag on restaurant-level profits.” Levy lowered his second quarter EPS view by 20c to $2.04 and highlighted that management indicated sequential expense pressures are expected to persist and could near 100 basis points of additional costs versus the prior consensus forecast for restaurant-level margins. The analyst keeps a Sell rating on the shares, arguing that Chipotle “faces an uphill battle” to regain lost sales while lifting margins

PRICE ACTION: Shares of Chipotle remain down 6.7% to $428.31 in late day trading.

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